Jobs can teach kids a lot about life — but they can teach some tax lessons to parents, too.
Here are a few tips for ensuring your teen’s summer employment or after-school foray into the working world doesn’t stick you with a tax-related cleanup job in April.
Figure out whether and how to report the income
Generally, the IRS considers income from a job as “earned income,” and it considers interest, dividends and several other kinds of non-job inflows as “unearned income.”
Unearned income comes with some special rules. In some cases, for instance, a kid’s unearned income might end up on a parent’s tax return or be taxed differently, explains Lee Reams Sr., an enrolled agent in Newport Beach, California. An enrolled agent is a federally authorized tax professional who can represent taxpayers before the IRS in collections, audits and appeals.
But if all your teen has is earned income — a plain-vanilla summer job or after-school gig as an employee at the local pizza parlor, for example — he may need to file his own tax return, Reams explains. Being under 18 or being your dependent doesn’t automatically get a kid out of having to file, the IRS warns.
Earning less than the standard deduction might open an escape hatch, however. Typically (there are exceptions), unmarried dependents won’t have to file a federal tax return this year if they only had earned income of less than $12,000, Reams says. States may have different rules, though.
Consider filing a tax return no matter what
Even if your teenager doesn’t have to file a tax return, she might want to anyway, says Morris Armstrong, an enrolled agent in Cheshire, Connecticut.
That’s because if the employer withheld taxes from her pay (you’ll be able to see that on her W-2 when it arrives in January or early February), filing a tax return could get her some or all of that money back in the form of a tax refund.
Check whether your teen was an actual employee
If a 1099 arrives in the mailbox instead of a W-2, that’s a sign that, technically speaking, your kid was an independent contractor rather than an employee. That can complicate things, so you may want to consult with a qualified tax advisor. Generally, the IRS requires dependents earning more than $400 from self-employment to file a tax return, for one thing. Plus, he may have to pay some extra taxes and may be able to write off certain expenses, notes Michael Eisenberg, a member of the American Institute of Certified Public Accountants’ National CPA Financial Literacy Commission.
Remember, you’re still the parent
Your child’s status as your dependent won’t change simply because she files a tax return, Eisenberg says. In the eyes of the IRS, dependency is determined by how much support you provide, who lives where and several other circumstances.
That means if you qualify for the child tax credit, for example, you probably can still claim it even if your kid files her own tax return, he notes.
Avoid full-price tax prep
Teens can often get deals on tax preparation. Most major tax-prep software companies offer free versions for simple tax returns (you may still have to pay for a state tax return, however), and the IRS’ Free File program offers free name-brand tax software to people with adjusted gross incomes under a certain threshold.
If your kid’s tax return is fairly simple, many tax preparers will discount their fees, too, Armstrong says.
“If the kid’s in college, let’s say, and has a bit more complicated issues and you’re trying to generate a tax credit for him off of one of the education programs, then you might charge full rate,” he notes.
Embrace the real-world lessons
Helping your child prepare his or her first tax return is a great teaching moment, pros say.
“If you actually sit them down and make them do the tax return, that might be a very good educational process,” Reams explains. “Although theirs is pretty simple, down the road they’re going to have to understand all this.”
You can also use the occasion to discuss the importance of saving, too. Kids may not get excited at the thought of putting their tax refunds or part of their paychecks into a Roth IRA, for example, but they might if you show what even just a few thousand bucks could grow into, Reams says.
“Can you imagine just what that’s going to be worth after 40, 50 years?” he says.
Having tax-prep talks now could also mean less tax-prep work later for you, Armstrong adds.
“If you do it for the kid at 14, when he’s 24 he’s going to be wanting you to do it for him too,” he warns.